Saccomanni downplays S&P downgrade

Based on old data, economy minister says

Saccomanni downplays S&P downgrade

(By Denis Greenan). Rome, July 10 - Italian Economy Minister Fabrizio Saccomanni on Wednesday downplayed Standard & Poor's decision to cut its credit rating for the eurozone's third-largest economy, accusing the US agency of basing its forecasts on outdated figures and ignoring the continuing success of Italian bond auctions. He also criticised the role of credit agencies in general, suggesting that after a string of past bad calls including missing the signs of the US financial crash in 2007-2008, they no longer had the authority to issue verdicts that could destabilise economies. Talking to the annual general meeting of the Italian Banking Association (ABI), Saccomanni said S&P's Tuesday downgrade of Italian sovereign debt from BBB+ to BBB, with a negative outlook, "appears to be based on a mechanical extrapolation of past data". He also said the rating agency's "perception of risks was only based on worst-case scenarios". Saccomanni added that "what will really count will be the considerations made by Italian and foreign investors" and that today's bond issues "went pretty well" despite the downgrade. On the status of agencies like S&P, Moody's and Fitch, Saccomanni said "the jury is still out" on whether they can recoup the reputation that took a big dent from misreading glaring signs of recent financial bubbles and crashes. He suggested their rulings should not be taken as "holy writ, and used to pass judgement on economies, especially those with certain difficulties". "The debate on the role of ratings agencies has been open for some time," Saccomanni told ABI. He said their decisions could have "destabilising effects" as well as "pro-cyclical ones", meaning they could exacerbate existing trends. One of ABI's leading lights, Intesa SanPaolo CEO Enrico Cucchiani, said he agreed with the minister. "Their verdicts can carry that risk," said the head of Italy's biggest bank by market capitalisation. "I think their views should just be used as a spur to government policy," Cucchiani added. Governments should in any case "think in the long term," the Intesa chief said, "because their time frame is different from that of the markets". In its downgrade statement Tuesday, S&P said Italy's economic prospects are getting weaker despite the efforts of the recently installed left-right coalition government to revive an economy suffering its longest recession in more than 20 years. Italian media responded to the S&P move by speculating it was linked on continuing wrangles between the unusual government partners on how far to do away with a controversial property tax and how to get the money to make up for averting a VAT hike. The ratings agency seemed to have ignored, the Italian press said, the government's recent success in wresting concessions and hard cash from the European Union for job-creation schemes to tackle record unemployment, especially for younger job-seekers. Italy's overall unemployment rate is 12% and almost 40% among 15-to-24-year-olds. The new BBB rating remains investment grade and is two notches above "junk" status. Issuing the negative outlook, S&P said it might make another downgrade later this year or in 2014. Lower credit ratings can make it more expensive for the government to borrow money and can spook bond investors. Italy's huge sovereign debt of more than 130% of GDP, the second-biggest in the eurozone after Greece's, is the main reason it is periodically exposed to investor speculation that rose to a crescendo in late 2011 and raised fears of Rome sparking a meltdown in the currency bloc. On Tuesday S&P argued that Italy's economic output is falling and its economic prospects are getting worse after a decade of weakness. It now expected Italy's GDP to fall by 1.9% this year, worse than the 1.4% decline it forecast in March.

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